Amazon (NASDAQ:AMZN) has solidified its leadership in the online retail business during the pandemic. But we have also seen that Walmart (WMT) has been able to leverage its massive store base to improve its own e-commerce growth rate and market share. Walmart's online retail year-on-year growth rate of 97% in the second quarter and 79% in the third quarter were far more than Amazon's 49% and 37% growth rate in the second and third quarter respectively. The recent quarter also showed Walmart's e-commerce YoY growth of 69% compared to 43% for Amazon. This has increased Walmart's overall market share in the online retail industry and has also improved its margins.
The real battle in the online retail segment is to increase the high margin advertising sales. Amazon has much better tools and has a long experience in providing advertisers with good returns on their online ad spend. Walmart will also face a problem where its store advertising dollars are moved to online advertising. This will give lower incremental ad revenue to the company.
Amazon has an advantage due to the strong loyalty for Prime membership and its rapidly growing video and music streaming business. The rapid adoption of Echo and other smart home devices also allows Amazon to build a stronger moat around its products and services which will be difficult for Walmart to overtake.
Higher Growth Rate From A Lower Base
Walmart's e-commerce growth rate during the last three quarters of the pandemic has been higher than Amazon's. However, Walmart's revenue base of online sales is just a fraction of Amazon's e-commerce business.
Figure 1: Online retail market share of different companies. Source: eMarketer
We can see from the above chart that Amazon's year-on-year growth in e-commerce sales is 39% while Walmart's growth is over 65%. On the other hand, Amazon has a market share of 39% while Walmart has a market share of 5.8%. Hence, it is easier for Walmart to increase its revenue from a lower revenue base.
Figure 2: Walmart's e-commerce growth rate in the last few quarters. Source: CNBC
Another major difference in the e-commerce sales of Walmart and Amazon is that Walmart places the curbside pickup service within the online e-commerce segment. During the pandemic, the curbside pickup became even more popular as customers refrained from crowding in the stores. These curbside sales are more about a transfer of retail purchases from in-store and do not give significant incremental revenue to Walmart.
Obviously, Amazon does not have a store base similar to Walmart which limits its ability to provide curbside pickup. This creates a difference in the e-commerce growth rate of the two giants.
Battle for Advertising Dollars
The profit margins in online retail are wafer-thin. Amazon had posted a loss in its online retail segment for a number of years. Only after the rapid growth of its advertising business was the company able to show some profits in the overall retail business. The digital advertising segment is a very high-margin business and is growing rapidly as all the e-commerce retailers try to attract more advertisers.
Figure 3: Increase in advertising dollars going to e-commerce retailers. Source: eMarketer
A recent report by eMarketer has forecasted that e-commerce ad spending will increase by 29.8% in 2021 and continue to grow rapidly over the next few years. Amazon is currently the market leader in this segment due to its higher market share in online retail and the better tools developed by the company to attract advertisers.
Figure 4: Amazon's advertising sales in the last few quarters. Source: Amazon Filing
In the last few quarters, Amazon's advertising sales have shown a year-on-year growth rate of over 40%. The trailing twelve-months revenue of this segment is $21 billion. If the company continues to maintain the current growth trajectory, it will be able to reach $50 billion mark by 2023.
According to eMarketer's report, Walmart will be able to show advertising sales of $850 million in 2020 on the back of massive growth in e-commerce sales. WSJ has mentioned that both Walmart and Kroger are looking a build a strong online advertising business and investing heavily in the technology. Given the high margins in this segment, we should see Walmart's management double down on advertising to improve the overall margins of the e-commerce sales.
However, there is still a massive gap between Amazon and Walmart in the advertising business. At least in the near term, it would be very difficult for Walmart or any other e-commerce company to deliver advertising revenue comparable to Amazon.
Amazon's Advantage in Media Assets
Amazon has created a strong ecosystem of media assets. It has a market leadership position in the smart speaker space and is launching new products for media consumption in its smart home portfolio. Amazon's video and music streaming business has also cornered significant market share in their respective industry. Prime members can buy Echo devices at massive discounts and buy Amazon Music service at $3.99/ month compared to $9.99/month service by Spotify (SPOT) and Apple Music (AAPL). These discounts improve the value proposition for customers and help the company build a stronger ecosystem.
Amazon's media assets have helped improve the attraction for Prime membership and also increased the retention rate. In the trailing twelve months, the subscription service had a revenue base of $25 billion and a YoY growth rate of close to 30%.
Figure 5: Subscription growth in Amazon. Source: Amazon Filing
This massive subscription revenue base helps Amazon increase its investment in shipping and logistics which builds a positive cycle for the company. Walmart is also trying to compete with Amazon's subscription business with its Walmart Plus membership. It has recently scrapped the $35 minimum purchase requirement for free shipping in Walmart Plus membership. But Walmart still lacks a video streaming service. It has canceled its plans to start its own streaming service to rival Amazon because of the high price tag.
While Walmart has an advantage over Amazon due to its high store base, it is also at a big disadvantage due to a lack of media assets. It will be important to note the online growth trends for Walmart and Amazon for the next few quarters. But it is highly likely that Amazon will continue to solidify its market leadership position in the online retail space due to a strong Prime and advertising business as well as improvement in its media assets.
Investor Takeaway
Walmart's growth in e-commerce segment was significantly higher than Amazon in the last three-quarters of the pandemic. However, the company has a lower revenue base compared to Amazon. It is also shifting a lot of in-store sales to a curbside pickup which does not provide incremental sales.
Walmart is at a disadvantage over Amazon due to its lack of attractive media assets in the streaming video and music segment. This will make it harder for Walmart to compete directly with Prime in the subscription business. It is still important to look at the future trajectory of online advertising between Amazon and Walmart because this is the highest gross margin business for both companies. Despite the higher e-commerce growth rates, Walmart is still far behind Amazon in terms of market share and the strength of its ecosystem.
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Now, delving into the article on the competition between Amazon (NASDAQ: AMZN) and Walmart (WMT) in the online retail space, let's break down the key concepts discussed:
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Online Retail Growth During the Pandemic:
- Amazon solidified its leadership in online retail during the pandemic.
- Walmart leveraged its massive store base for significant e-commerce growth, surpassing Amazon's growth rates in the second and third quarters.
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E-commerce Growth Rates:
- Walmart's year-on-year e-commerce growth rates were consistently higher than Amazon's during the last three quarters of the pandemic.
- Walmart's growth rates were 97%, 79%, and 69% in the second, third, and recent quarters respectively, compared to Amazon's 49%, 37%, and 43%.
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Market Share and Revenue Base:
- Amazon has a market share of 39%, while Walmart's market share is 5.8%.
- Despite Walmart's higher growth rates, its revenue base in online sales is a fraction of Amazon's e-commerce business.
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Curbside Pickup and E-commerce Growth:
- Walmart includes curbside pickup within its e-commerce segment, which contributed to its higher growth rates.
- Amazon, lacking a similar store base, faces a difference in e-commerce growth rates.
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Advertising in Online Retail:
- Both companies are vying for high-margin advertising sales, crucial for profitability in the online retail sector.
- Amazon's tools and experience give it an advantage, especially with the loyalty of Prime membership and a growing media business.
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E-commerce Advertising Spending:
- E-commerce ad spending is projected to increase by 29.8% in 2021, with Amazon leading due to its higher market share and advanced tools.
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Amazon's Advertising Business:
- Amazon's advertising sales showed a year-on-year growth rate of over 40%, with a revenue base reaching $21 billion in the trailing twelve months.
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Media Assets and Subscription Services:
- Amazon's strong media assets, including smart speakers and video/music streaming, contribute to its market leadership.
- Prime membership's subscription revenue base is $25 billion, helping Amazon invest in logistics and enhance its ecosystem.
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Walmart's Challenges:
- Walmart, despite its e-commerce growth, faces challenges in competing with Amazon's subscription business due to the lack of attractive media assets.
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Investor Takeaway:
- While Walmart has shown higher e-commerce growth rates, Amazon maintains a dominant market share and a robust ecosystem, making it challenging for Walmart to compete directly.
In conclusion, Amazon's stronghold on the online retail space is reinforced by its Prime loyalty, advertising business, and media assets, presenting challenges for Walmart to catch up despite its impressive e-commerce growth. This analysis provides a comprehensive overview of the competitive dynamics between the two retail giants.
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